HoneyBook’s Billion Dollar SaaS Network Effect

According to a study by venture firm NFX, 70% of value in tech is driven by network effects. But when most people think of network effects, they think of marketplaces and social networks. Not SaaS.

In this case study we’ll explore how HoneyBook, a SaaS focused on streamlining the proposal and invoicing workflow for freelancers, has built a powerful network effect into their SaaS. And how it’s helped them grow to process over $1 Billion in transactions, and achieve 150% YoY growth between 2017 and 2018.

A few things we’ll dive deeper into:

How HoneyBook’s network plugs into their SaaS, and how the network and SaaS components act synergistically to drive growth.

The viral growth loops HoneyBook has baked into their network.

The strategy playbook HoneyBook has followed for building and expanding its network.

It’s worth prefacing before we jump in, this has nothing to do with the “data network effects” commonly associated with SaaS. The team over at a16z recently did a great write up on the empty promise of data moats if you’re interested in those.

The Unusual Journey from Social Networking to SaaS

HoneyBook has had network effects in its DNA since the beginning. They launched a closed beta in late 2012 offering a platform that wedding photographers could use to post and share photos and videos with their clients.

The platform was designed with social networking in mind, allowing newlyweds to share their photo albums with friends and wedding guests. And gave guests the option to tag, comment, and like photos.

Shortly after launch, the team pivoted to providing SaaS invoicing and project management tools to a wider audience of wedding vendors. And moved away from their positioning as a social photo sharing platform.

But rather than go all in with a traditional SaaS model, they decided not to abandon their social networking roots. Instead, they added a networked “twist” to their SaaS model that has helped them leverage the power of network effects to achieve some outstanding results…

Connecting Industry Players and Reducing Friction at the Same Time: Building a Market Network

In 2013 the founders of HoneyBook met with James Currier from NFX, a venture firm specializing in network effect start-ups. James walked them through the idea of a market network.

A market network combines the core elements of both markets and networks. Providing a platform where entities can set-up unique profiles and communicate with each other (social network). As well as a place where those entities can transact with each other (marketplace).

At the center of the market network is a SaaS workflow that helps facilitate transactions between members of the network. This SaaS component is especially important in industries involving complex, lengthy projects.

The wedding and events industry HoneyBook was already focusing on was a perfect fit for this new model. Event planning often involved coordinating with multiple vendors, which means there was an multi-sided market HoneyBook’s platform could connect together. Events also often took months to plan and involved a clunky, frustrating UX of tracking down emails and signing paper contracts that a SaaS workflow could streamline.

Here we can see the variety of different vendors connected in HoneyBook’s multi-sided market network. This network of vendors creates unique marketplace dynamics where transactions can happen between a variety of different nodes or profile types vs. a 2-sided marketplace with more narrowly defined buyer and seller roles.

Come for the Tool, Stay for the Network

Come for the Network, Stay for the Tool

In exploring strategies for bootstrapping networks, Chris Dixon coined the phrase “come for the tool, stay for the network.” The famous example of this is Instagram, which started out offering a photo filter tool. New users came for the free filters (with the option of sharing on other social networks like Facebook and Twitter), and then were drawn into participating in Instagram’s own social network.

Combing through WayBackMachine archives of HoneyBook’s website, this appears to be their strategy early on as well. Their core value proposition focused on their SaaS workflow tool for helping event vendors streamline the proposal, invoicing, and project management process.

Then once users were in the door, they could connect with other vendors in their area and explore opportunities like referring business on big events in need of other vendors.

However, after securing series B funding in 2015 their strategy shifted to also focus on growing the network directly. That year they launched a networking tool separate from the core SaaS called Collectives that allowed vendors to start their own private networking groups. This created a new, direct entry point into HoneyBook’s network.

A new user might be invited to join a networking group via an offline relationship. Then, once they were on HoneyBook’s platform they would be exposed to HoneyBook’s core SaaS product. They would also be likely to receive recommendations for the SaaS product from other members of the networking group that had already started using it.

This resulted in a double funnel strategy of promoting the SaaS (come for the tool, stay for the network) as well as promoting the network (come for the network, stay for the tool).

Each side of the funnel amplifies the growth of the other. The better the SaaS tool performs in terms of attracting, converting, and retaining users the more people will ultimately be drawn into the network. And the better the network performs in terms of attracting new members, the more users it will drive into the SaaS tool.

Both sides of the business feed and amplify each other.

Monetizing Market Networks, and the Synergistic Role of SaaS

Like other SaaS, HoneyBook charges a subscription fee for access to its core proposal and invoicing workflow product. And because it focuses on facilitating transactions via this workflow, it also offers credit card payment processing on which it takes a fee for each transaction.

This payment processing fee is where things get interesting.

Because HoneyBook is a market network, one of its functions is to facilitate referrals and other deals between members. Since many of these members also use HoneyBook’s SaaS invoicing tool, that means that any deals they do through the network will also get processed through the invoicing tool. Upon which HoneyBook will earn a payment processing fee.

This creates a unique synergy between the SaaS tool and the network. The better the network is at reducing friction between referrals, the more referrals will get funneled through the SaaS invoicing tool by the members using it, and the more HoneyBook will earn in payment processing fees.

And the better the SaaS tool is at reducing friction in the proposal and invoicing process, the more transactions will convert through the workflow, the more HoneyBook will earn in payment processing fees, and the more likely network members will be to do deals with each other again in the future.

Each side of the business acts synergistically with the other to drive revenue as well as user value.

How to Grow a Market Network

Building a network from scratch is notoriously hard. In many cases, it comes down to a chicken or egg problem. Networks often don’t provide much value until there are enough nodes or users in the network. And no one wants to join the network until this critical mass is reached.

The same can be said for marketplaces, where a similar critical mass of buyers and/or sellers is often needed before the marketplace is attractive enough to each side of the market.

Market networks with a SaaS workflow at the center present a unique possible solution to this problem. By focusing on the SaaS product first, you have a viable product that at least one side of your market (or a segment of the network) is interested in. You also have a viable revenue stream while you work toward critical mass. Then, once you’ve built up one or more sides of your market network, it becomes much more attractive to the other segments.

In HoneyBook’s case, they built a SaaS solution that the entire network they were targeting could utilize (invoicing for wedding and event vendors). This allowed them to slowly grow all segments of the network directly with the SaaS product.

They also deployed several other strategies to help accelerate the growth of their network…

Narrow Geographic Targeting and Building a Local Network Effect

Rather than target a wide geographic area right away (like the entire United States), HoneyBook decided to focus first on building local network effects in narrower geographic target areas.

Since weddings and other events are often coordinated by local vendors, this strategy makes a lot of sense. Vendors in San Francisco don’t get a lot of value by collaborating with vendors in New York. So launching and quickly hitting a critical mass in local markets was important for demonstrating value to new users.

HoneyBook focused on San Francisco as their initial target city, and then expanded to Los Angeles and New York before continuing to open up the platform to a wider geographic audience.

Un-Throttling the Network: Expanding Beyond the Events Vertical

One of the big pivots HoneyBook appears to have made on its growth journey was expanding beyond the events vertical to target the broader freelancing community. Creative professionals like photographers and graphic designers were already a part of the events vertical, so they had a solid base for expansion into the broader freelancing community.

This is a great example of a throttled network. HoneyBook’s network was throttled by the parameters of a specific vertical, but was ripe for expansion into the horizontal freelancing market. Similar to how Facebook was initially throttled through its targeting of University communities, and then later expanded to serve a mass market.

One of the key strategic advantages of being a throttled network, is that HoneyBook was able to work on building critical mass in their network without up-start competitors noticing where they were heading. Early news snippets hyped HoneyBook’s focus on the events industry, keeping the company’s network in stealth mode to any competitors in the horizontal freelance market.

Given the nature of network effects and their potential for defensibility, getting a head start on competitors in building your network can be a huge advantage. Once your network hits critical mass and the network effect kicks in, it becomes much harder for competitors to catch up or compete.

The Hard Work of Cultivating an Engaged Community

It’s important to highlight that underneath all the clever business model levers, HoneyBook has done a remarkable job of executing on the more tactical side of community building.

Early on, they launched their Rising Tide Society based on the premise of fostering collaboration rather than competition among creative professionals (a rising tide lifts all boats). This essentially serves as the content marketing and events arm of the business.

Through Rising Tide they’ve not only done a brilliant job of executing on content marketing, but have also incorporated things like regular in person meetups for the community. These community building tactics likely create a more engaged network of users, and make the network more sticky. They also create a community culture differentiator that uniquely positions HoneyBook’s network against potential competitors in the freelancing space.

I could write a whole other post on all the community building tactics HoneyBook is executing, but you can poke around yourself for now.

Exploring The Growth Effects in HoneyBook’s Market Network

Since launching its initial networking tool that gave users the ability to form private networking groups, HoneyBook has continued to optimize and expand its networking features. Today, its networking features are found under the “People” and “Opportunities” tabs alongside the core SaaS invoicing product (found under the “Business Tools” tab).

Rather than focus on small, private groups the latest networking feature set allows you to search and filter people and deal opportunities across the entire network.

While you can still form connections with individuals across the network, the focus seems to be shifting toward making the entire network more accessible. As well as providing a robust set of filters that allow you to zero in on the right people and opportunities on the network.

This shift away from small, private groups is likely tied to the expansion beyond the events vertical and into the horizontal freelancer market. While a small private group probably gave local event vendors all the connections necessary to collaborate on events happening in their local market, freelancers would be more likely to collaborate outside their local area and on a wider variety of projects.

Let’s dive a little deeper into this current iteration of their network, and look at some of the growth effects at play here…

Viral Growth Effect

This is one of the most obvious growth effects associated with networks, but also a very powerful one.

As vendors benefit from the streamlined workflows of both the core SaaS product and the deal features of the network, they are likely to invite any offline connections to join them on the network so they can both benefit from the reduced friction in any deals they may do together.

A vendor may also have formed connections on HoneyBook that they think could be a good match for deals with their offline contacts. Leading them to invite offline contacts to participate in the new opportunities.

This creates a powerful viral growth loop, where each new user spreads HoneyBook through their existing offline network. HoneyBook further facilitates the loop with features like the ability to sync Google contacts with a user’s account.

HoneyBook could experiment with other ways to further amplify this growth loop, like offering referral incentives (possibly a discount or extended trial of the core SaaS invoicing product).

Nurture Effect

Because the SaaS product and the network exist side by side instead of being fully integrated with each other (you don’t need to be a paying member of the SaaS to participate in the network), the network serves as a unique lead nurturing tool for the SaaS product.

Network users who don’t see the value in the SaaS product immediately will continue to be exposed to the SaaS offer anytime they participate in the network, via the UI of the networking features.

And maybe more powerfully, network users who do use the SaaS can become advocates of the SaaS product and help convince non-users to give it a try. In the screenshot below you can see members posting on community discussion streams with their affiliate links for the SaaS product.

This presumably could also help with user churn of the SaaS product. Assuming a user churned out of the SaaS but remained a member of the network, they could be nurtured to reactivate at some point in the future. Adding an extra layer of stickiness to the platform as a whole.

Network Effect

Ahh we’ve finally made it to the actual network effect. Where the value of the network increases as more users or nodes are added to the network.

In HoneyBook’s case, the argument would go that the more freelancers added to the network, the more valuable opportunities and referrals would be available to everyone who joins the network. This might not be an open and shut argument though. It’s tough to say at what point the size of the network starts to have diminishing returns on things like the quantity and quality of referrals shared between users.

Under HoneyBook’s original network model, users were invited to start private groups with 10-20 members. These groups were likely tight knit, and generated a low friction deal environment because of the high levels of trust (everyone can get to know each other personally).

The dynamics of a larger, more open network will be different. It’s possible that as the network grows, more niche opportunities will be available from the broader user base. With the right filtering tools, freelancers can zero in on the perfect opportunities. However, there is also the risk with a larger network that the quality of the relationships could suffer if users struggle to find the signal in the noise.

Let’s explore this a little more in the next section…

Moat Effect

Directly tied to HoneyBook’s network effect is the defensibility it generates. As the network and corresponding value it offers grows, users will in theory be less attracted to smaller networks. This would give HoneyBook a competitive edge, and make it harder for smaller networks to catch up.

To explore how durable the moat generated by HoneyBook’s network effect is, one factor to consider is multi-tenanting – or how likely it is for freelancers to utilize multiple different networks or marketplaces at the same time. By expanding into the broader freelance market, HoneyBook is now competing with a variety of different networks and marketplaces. Some tailored to niche verticals, and others to the broader horizontal freelance market.

Given the low transaction volume for freelancers, it’s possible that multi-tenanting won’t be a major factor i.e. you only need a small number of leads to thrive, so why put the energy into joining multiple networks. In which case it could create a winner take all situation, and HoneyBook’s network effect could pay off in a big way.

I think you also have to look at the potential advantages these other networks/markets may have based on their unique positioning. For example, I recently signed up for a similar market network called Communo which offers a platform for agencies and freelancers to collaborate on projects. Communo is positioned slightly differently by bringing agencies together with freelancers, and also charges $99 a month which would add friction to potential multi-tenanting. But the price of admission also keeps the network membership quality high.

Another example of a competitor with slightly different positioning is WeWork, which gives co-working space members access to a directory of members along with search and filtering tools. Here the unique focus is on connecting you with people who may already share an IRL community space with you, while also allowing you to tap into a broader worldwide network as needed.

This competitive landscape highlights the risk of expanding beyond HoneyBook’s event planning vertical, as well as the potential reward if it can win its market with the right value proposition and positioning.

Bundling Effect

Ultimately, the biggest factor driving defensibility for HoneyBook could lie in how it has bundled and integrated the SaaS product and network together.

For users of the SaaS proposal, invoicing, and project management tools the referral network acts as a natural extension of their day to day business development and administration routine. If you’re logging on to check client invoices or create proposals everyday, why bother seeking out other freelancer networks when there’s already one baked into HoneyBook?

The fact that network referrals naturally plug into HoneyBook’s SaaS flow (as we discussed earlier), only amplifies this effect. Each side of the business makes the other more sticky.

Growing the Next Generation of Networks and Marketplaces

HoneyBook serves as a pioneering example of the next wave of networks and marketplaces. In the previous wave, we saw companies like Linkedin form broad networks that have worked well for establishing loose professional connections. But lacked the focus or SaaS tooling to effectively facilitate complex projects.

We also saw marketplaces like Taskrabbit and Fivver bring people together for simple, commodified transactions. In cases like these, the quality of the person on the other side of the transaction doesn’t matter as much because it involves a simple, low value outcome (pick up my laundry, create a Twitter account for my business, etc.). These simpler transactions don’t need to be facilitated with complex SaaS tooling, or require advanced networking features to bring users together around bigger projects.

Now, companies like HoneyBook are tackling the higher value service sectors like event planning, home remodeling, or startup funding. Where projects are often complex; involving multiple parties, taking months to complete, and where choosing the right service provider is important to producing high value outcomes.

In sectors like these, SaaS tooling plays a critical role in streamlining complex workflows. Networked profiles are key for vetting the right providers. And a marketplace function helps facilitate deals between multiple parties on big, lengthy projects.

HoneyBook is a great example of how bringing all these ingredients together can create enormous new value for users. And how they can also unlock powerful forces like network effects and viral effects, to help drive growth at much higher rates than what might be found in a stand alone SaaS.